Buy-to-letwatch

As investors tend to choose light refurbishment over bridging loans for cost- and time-saving reasons, brokers should investigate whether these products may provide more suitable option for clients

David Whittaker

For some time now light refurbishment products for residential property investors have been thin on the ground and brokers have been recommending to clients bridging loans as a viable alternative.

Indeed, the last two years have witnessed a meteoric rise in the use of such short term finance for properties requiring a bit of an overhaul.

But there are rumblings from some lenders that light refurbishment products are making a small comeback.

For those of you who are unfamiliar with light refurbishment products, these are mortgages for residential property investors who are looking to purchase or remortgage properties that, although habitable, need works done prior to being able to generate an income.

Light refurbishments typically include:

  • Replacing kitchen and/or bathroom

  • Redecorating

  • Fixing damp

  • Re-wiring and/or updating heating system

  • Installing new windows

  • Internal plasterwork and/or rendering external walls

Here’s an example of how they work. The investor buys a property for £100,000 with a deposit of 30 per cent. Using his own money, he spends £20,000 refurbishing the property.

The new valuation values the property at £140,000 and confirms that a higher rental figure could be achieved allowing the investor to raise a further £28,000 – 70 per cent x £40,000 = £28,000. Obviously, this pays for the refurbishment costs and leaves a further £8,000 which more than covers the revaluation costs.

The main reason investors choose light refurbishment over bridging is cost. Bridging loan rates are more expensive and the investor then has the additional hassle of having to go to a new lender to refinance onto a cheaper, longer term product, which in turn generates more costs including a fresh valuation, arrangement fees, legal fees and possibly another broker fee.

In most cases the borrower also has to wait six months to refinance. Because of this, if at all possible, brokers should investigate whether light refurbishment might be a more suitable option for clients.

For a while now one of the only providers of a specific light refurbishment product for buy-to-let properties has been The Mortgage Works which offers a two year fixed rate of 5.74 per cent, until 31/10/2014, reverting to SVR, currently 4.99 per cent with an arrangement fee of 2.5 per cent.

The limitations of this product are that it only allows further advances up to £25,000 and it’s not suitable for more complex buy-to-let transactions such as houses in multiple occupancy, bedsits and multi-unit freehold blocks. But it will accept first time landlords looking to borrow up to 65 per cent LTV.

Aldermore Bank also has a light refurbishment product providing up to 65 per cent of the purchase price on day one and then further funds up to 70 per cent of the end value post refurbishment and re-inspection. Pricing varies but expect in the region of 5.4 per cent over LIBOR with a 1 per cent loading during the refurbishment phase.

Lender Shawbrook, recently introduced a specific medium-term light refurbishment product into its mix which is also worth considering for your clients. It is a product only for experienced investors of strong personal net worth with a track record of completing renovations.

For an arrangement fee of 2.5 per cent, it offers LIBOR + 5.45 per cent to 70 per cent LTV for up to five years on an interest-only basis.

Specialist brokers with strong lender relationships may also be able to negotiate a bespoke deal for the right refurbishment project as this case study shows:

We recently had a broker approach us on behalf of a client who was looking to purchase a five-bed house in north London for £560,000. The client has a portfolio of 16 London properties that she owns jointly with her husband, although in this instance, she was looking to purchase in her name only. 

The house had been owned by the same family for 40 years and the valuation report showed that they had partially sub-divided it, installed a second kitchen and there were signs of damp which meant it was not suitable for the standard buy to let mortgage we had ear-marked from Keystone Buy to Let Mortgages.

We immediately took the case to the team at Aldermore Bank who, within 24 hours, agreed to lend £350,000 on a 10 year interest-only basis at Libor +5.50 per cent.

In a side letter, Aldermore also agreed to revert the deal to Keystone once the works are done with no ERCs on the bank facility – just the original fee that would have been paid for the Keystone product. 

Once the works have been completed, the revaluation confirms the increase in value and an AST is in place, Keystone will consider a move to a higher loan amount, potentially £420,000.

In addition to all this, Keystone will consider refinance within six months of purchase. This sort of deal will clearly save the client time and money.

Light refurbishments aside, in the below table is a selection of some of the best buy-to-let mortgages currently available.